PROPOSED FEDERAL TAX POLICY ADJUSTMENTS: REDUCING GHG EMISSIONS AND GENERATING REVENUE - Recommendations for budget 2017 - Equiterre
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PROPOSED FEDERAL TAX POLICY
ADJUSTMENTS:
REDUCING GHG EMISSIONS AND
GENERATING REVENUE
Recommendations for budget 2017
By Environmetal Defence and Équiterre
December 2016
The recommendations related to diesel-gasoline tax deferential, the federal tax on fuel-inefficient
vehicles and the tax incentives on green buildins were prepared for Équiterre by Carist Consulting.
Authors: Rachel Samson and Sara Rose-Carswell, Carist Consulting Incorporated
Carist Consulting
www.caristconsulting.com/index.html
Any errors or omissions are the responsibility of Équiterre.
About: Équiterre – changing the world, one step at a time
With more than 130,000 followers, 20,000 paying members and 1953 media mentions (in 2014),
Equiterre is Quebec's most prominent environmental group[i] and one of the most influential ENGO
federally. For over 20 years, Equiterre (legal name ASEED) has worked with citizens, farmers,
organizations, think tanks, businesses, municipalities and governments of all stripes to influence
environment and climate change policies and related practices in Quebec and Canada. Équiterre’s
national policy work is led out of its Ottawa office.
Contact:
Annie Bérubé, Director, Government Relations,
aberube@equiterre.org
www.equiterre.org
About: Environmental Defence
Environmental Defence is Canada’s most effective environmental action organization. We challenge
and inspire change in government, business and people to ensure a greener, healthier and prosperous
life for all.
Contact:
Dale Marshall, National Program Manager
dmarshall@environmentaldefence.ca
www.environmentaldefence.ca
Supported by The Minor Foundation for Major Challenges
2
Table of contents
INTRODUCTION 7
1 ADDRESSING THE DIESEL-GASOLINE TAX DIFFERENTIAL 10
Trends in Diesel Use 10
Environmental Performance of Diesel vs. Gasoline 11
Current Taxation of Diesel Fuel in Canada 12
Canada has among the lowest taxes on both diesel and gasoline across OECD countries 14
Diesel Differentials across OECD Countries 16
Fuel Taxes can have an Important Impact on Driving Behaviour, Vehicle Choice and Innovation 17
European and Nordic Countries are moving to Balance Tax Rates on Diesel and Gasoline 19
Canada’s Diesel Tax Rates Should be brought into line with Gasoline Tax Rates 22
Recommandations 22
Estimated Impacts 23
Other Considerations 23
2 MAKING THE FEDERAL TAX ON FUEL INEFFICIENT VEHICLES MORE
EFFECTIVE 24
Trends in Vehicle Purchasing 24
Environmental Performance of Efficient vs. Inefficient Vehicles 26
Current Federal Taxation of Fuel Inefficient Vehicles 29
Many OECD Countries have Vehicle Purchase or Registration Taxes 31
Vehicle Taxes can Influence Purchasing Decisions 33
The Federal Excise Tax on Fuel-Inefficient Vehicles should be redesigned to increase its
effectiveness 35
Recommandations 36
Estimated Impacts 37
Other Considerations 37
3 EXPANDING FEDERAL TAX INCENTIVES FOR GREEN BUILDINGS 38
Trends in Buildings 38
Green Buildings 40
Barriers to green building projects in Canada 43
Current Federal Tax Incentives 44
Green Building Incentives in the United States 46
Federal level 46
Canada Needs Whole Building Incentives 47
Recommandations 47
Estimated Impacts 48
3
4 PHASE-OUT PREFERENTIAL TAX TREATMENT TO OIL AND GAS 48
Current preferential tax treatment to oil and gas in Canada 49
Coherent fiscal policy: Carbon pricing and preferential tax treatment to oil and gas 50
Recent and long-standing commitments to fossil fuels subsidy reform 51
Recommendations 52
ANNEXS 53
Annex 1: Canada’s fossil fuel subsidies 53
Annex 2: Current Application of Federal Excise Tax on the Most Fuel Inefficient Vehicles 55
Annex 3: Details on Calculations of Revenue and GHG Impacts 58
4
RECOMMENDATIONS
This report identifies four key areas for adjustment in federal tax policy to improve alignment with
Canada’s greenhouse gas (GHG) emission reduction goal, which is to reduce emissions by at least 30%
below 2005 levels by 2030. These fiscal measures will support policies announced in the Pan-Canadian
Framework on Clean Growth and Climate Change (PCF), particularly in reducing emissions in the
transportation and building sectors. Immediate changes to fiscal policies in Budget 2017 would provide
early incentives to automobile manufacturers and the construction industry to be ready for future
policy requirements contained in the PCF with regards to transportation and buildings. The proposed
fiscal measures will also be complementary to carbon pricing, ensuring coherent fiscal policies with
regards to carbon emissions, particularly in restoring the neutral of the tax system with respect to
investment in oil and gas production in Canada.
1. Address the Diesel-Gasoline Tax differential: Raising the tax rate on diesel fuel to be
equivalent to the rate on gasoline is advocated by the Organisation for Economic Co-operation
and Development (OECD), and is increasingly being pursued by OECD countries. The current
differential is on average roughly 4-6 cents per litre across Canada, despite the fact that diesel
has worse environmental performance than gasoline. Closing the tax gap could result in an
additional $350-700 million in annual revenue for the federal government, while reducing
GHG emissions by between 0.3 and 2 Mt annually (see Annex 2 for caveats and details relating
to these estimates). Raising both diesel and gasoline taxes over time could help bring Canada
in line with other OECD countries and further encourage a shift to low-carbon transportation.
2. Make the Federal tax on Fuel Inefficient Vehicles more Effective: The current tax on
fuel inefficient vehicles in Canada applies to too few vehicles and at too low rates to be
effective in influencing vehicle purchasing decisions and contributing to climate change goals.
Adjusting the tax to include more vehicles, and increase rates for more expensive vehicles,
could result in an additional $200 - $600 million in additional annual revenue for the federal
government, while reducing GHG emissions by between 1 and 2 Mt annually (see Annex 2 for
caveats and details relating to these estimates).
3. Extend tax incentives to increasingly energy stringent performance-based
requirements ( in energy use or GHG emissions intensity) for buildings: Current federal
tax incentives for renewable energy and energy efficient equipment are too narrow to
effectively encourage significant investments in overall efficient building envelope and
performance. New or extended tax incentives are needed that reward the cutting edge
building construction needed to avoid the lock-in of future building-related GHG emissions.
Expanded incentives could result in GHG reductions in the range of 0.5Mt to 3Mt per year,
5
depending on the degree of take-up and the level of the threshold established (see Annex 2
for caveats and details relating to these estimates).
4. Phase-out preferential tax treatment to oil and gas
5. In order to deliver on the Government of Canada’s commitment to phase out fossil fuels
subsidies and ensure effective implementation of the new federal carbon pricing mechanism,
Budget 2017 must put in place a plan to restore the neutral tax treatment of the oil and gas
sector in Canada, compared to other industrial sectors. This includes eliminating the Canadian
Exploration Expense tax credit the flow-through share deductions available to oil and gas
companies in Budget 2017. A timeline must also be announced to restore capital cost
allowances to a deduction rate equivalent to the rest of the industry (in most cases 25%) and
make necessary changes to Canadian Development Expense, the Canadian Oil and Gas
Property Expense, the Foreign Resource Expense and Foreign Exploration and Development
Expense to restore neutrality in the fiscal treatment of oil and gas expenses compared to other
sectors.
6
ALIGNING CANADA’S FISCAL POLICY WITH
THE PAN-CANADIAN FRAMEWORK ON CLEAN
GROWTH AND CLIMATE CHANGE
PROPOSED FEDERAL TAX ADJUSTMENTS
INTRODUCTION
Canada has committed to reduce GHG emissions by at least 30% below 2005 levels by 2030.
According to the Pan-Canadian Framework on Clean Growth and Climate Change, GHG emissions are
projected to rise to 742 Mt of CO2 equivalent in 2030. New climate policies as well as measures
announced in the Pan-Canadian Framework are expected to leave a gap of 44 Mt to reach the 524
Mt 2030 target1. In addition, according to Canada’s Mid-Century Long-Term Low Greenhouse Gas
Development Strategy more ambitious policies will be required now to put us on a deep
decarbonization pathway to 2050. Fiscal policy changes now are critical to shifting private investors’
capital to put Canada on this long-term low carbon economy trajectory.
There are several key sectors of the economy where greenhouse gas emissions are projected to
substantially grow to 2030 under current measures: oil and gas, freight transport, chemicals and
fertilizers, and buildings.2 Greenhouse gas emissions from oil and gas and chemical and fertilizer
sectors should be responsive to the proposed national carbon pricing mechanism. However, relatively
low carbon prices (in the range of $10 to $30/tonne), will be insufficient to induce all of the key
changes that are needed to transition to a low-carbon economy and achieve GHG targets in 2030,
particularly in the transportation and building sectors where individual and company choices on driving
behavior, vehicle purchase and building construction are key drivers of emissions growth. Without
immediate fiscal incentives, these sectors could continue to be locked into carbon intensive building
stock and high emitting vehicle stock for years to come.
1
Government of Canada (2016), Environment and Climate Change Canada, Canada’s Second Biennial Report on Climate
Change, http://ec.gc.ca/GES-GHG/default.asp?lang=En&n=02D095CB-1 (accessed September, 2016).
2
Government of Canada (2016), Environment and Climate Change Canada, Canada’s Second Biennial Report on Climate
Change, http://ec.gc.ca/GES-GHG/default.asp?lang=En&n=02D095CB-1 (accessed September, 2016).
7
Source: Government of Canada (2016), Canada’s Second Biennial Report on Climate Change
Figure 2: Freight Transport and Commercial Buildings are some of the key areas of projected
emissions growth in Canada to 2030
Source: Canada’s Second Biennial Report on Climate Change (2016)
Achieving Canada’s 2030 emission reduction goals will require additional, complementary policies
beyond carbon pricing that help to align economic and social policy frameworks towards long term
GHG reduction objectives. This paper considers four key opportunities for adjustments to the federal
tax system that would help reduce greenhouse gas emissions in the oil and gas, transportation and
building sectors:
8
1. Addressing the Diesel-Gasoline Tax differential: Raising the tax rate on diesel fuel to be
equivalent to the rate on gasoline is advocated by the OECD, and is increasingly being pursued
by OECD countries. The current differential is on average roughly 4-6 cents per litre across
Canada, despite the fact that diesel has worse environmental performance than gasoline.
Closing the tax gap could result in an additional $350-700 million in annual revenue for the
federal government, while reducing GHG emissions by between 0.3 and 2 Mt annually (see
Annex 2 for caveats and details relating to these estimates). Raising both diesel and gasoline
taxes over time could help bring Canada in line with other OECD countries and further
encourage a shift to low-carbon transportation.
2. Making the Federal tax on Fuel Inefficient Vehicles more Effective: The current tax on
fuel inefficient vehicles in Canada applies to too few vehicles and at too low rates to be
effective in influencing vehicle purchasing decisions and contributing to climate change goals.
Adjusting the tax to include more vehicles, and increase rates for more expensive vehicles,
could result in an additional $200 - $600 million in additional annual revenue for the federal
government, while reducing GHG emissions by between 1 and 2 Mt annually (see Annex 2 for
caveats and details relating to these estimates).
3. Extending tax incentives to increasingly energy stringent performance-based
requirements (in energy use or GHG emissions intensity) for buildings : Current federal
tax incentives for renewable energy and energy efficient equipment are too narrow to
effectively encourage green, energy efficient buildings. New or extended tax incentives are
needed that reward the cutting edge building construction needed to avoid the lock-in of
future building-related GHG emissions. Expanded incentives could result in GHG reductions in
the range of 0.5Mt to 3Mt per year, depending on the degree of take-up and the level of the
threshold established (see Annex 2 for caveats and details relating to these estimates).
4. Phase-out preferential tax treatment to oil and gas: In order to deliver on the
Government of Canada’s commitment to phase out fossil fuels subsidies and ensure effective
implementation of the new federal carbon pricing mechanism, Budget 2017 must put in place
a plan to restore the neutral tax treatment of the oil and gas sector in Canada, compared to
other industrial sectors. This includes eliminating the Canadian Exploration Expense tax credit
the flow-through share deductions available to oil and gas companies in Budget 2017. A
timeline must also be announced to restore capital cost allowances to a deduction rate
equivalent to the rest of the industry (in most cases 25%) and make necessary changes to
Canadian Development Expense, the Canadian Oil and Gas Property Expense, the Foreign
Resource Expense and Foreign Exploration and Development Expense to restore neutrality in
the fiscal treatment of oil and gas expenses compared to other sectors.
9
These four measures have the potential to make an important contribution to reductions in Canada’s
GHG emission trajectory, and are feasible and practical for near-term implementation. Every
megatonne of reductions will need to be pursued to achieve ambitious GHG reduction goals, and each
seemingly minor change will – when accumulated – help generate the shift needed to move towards a
low-carbon future.
The measures also leave the door open to greater ambition over time. For example, both diesel and
gasoline excise taxes could be increased over time to bring them closer to levels in other OECD
countries. The Federal tax on Fuel Inefficient Vehicles could also be further extended to heavy duty
vehicles and increased over time as more low emission vehicle options become available. The
threshold for green building incentives could be raised over time to ensure it meets the Pan-Canadian
Framework commitments to require “net zero energy ready” building code by 2030 and is supporting
the most ambitious projects.
1 ADDRESSING THE DIESEL-GASOLINE
TAX DIFFERENTIAL
Currently, Canada’s federal excise tax on diesel is set at 4 cents, while the excise tax on gasoline is set
at 10 cents per litre. The OECD refers to this as the Diesel Differential, and has advocated that
countries bring diesel taxes up to the same rate as gasoline taxes based on environmental grounds.
Several countries have already taken steps towards this end. Overall, Canada’s level of taxation on
both gasoline and diesel fuels is lower than most OECD countries and should be increased over time to
accelerate the shift towards low carbon transportation.
Trends in Diesel Use
Over the last 50 years in OECD countries, diesel use as a road fuel has increased overall relative to
gasoline and other fuels.3 Diesel fuel consumption is also increasing steadily in Canada.4 Diesel
accounts for approximately 25% of the fuel used on Canadian roads (slightly above the United States
at 20%).5 The heavy trucking fleet in Canada (and North America) is essentially diesel-powered.6 In
3
Harding, M. (2014), The Diesel Differential: Differences in the Tax Treatment of Gasoline and Diesel for Road Use, OECD
Taxation Working Papers, No. 21, OECD Publishing. http://dx.doi.org/10.1787/5jz14cd7hk6b-en.
4
Government of Canada, Statistics Canada, http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/trade37c-
eng.htm (accessed August 2016).
5
Harding, M. (2014).
6
Harding, M. (2014). Diesel represents 95% of the fuel used in the heavy vehicle transport market in the OECD.
10northern Canadian and remote communities, diesel is still a relatively less expensive fuel choice for
heating homes and powering factories.7
Heavy duty trucks are expected to be one of the key sources of GHG emission growth to 2030, and
sales of diesel passenger vehicles have been increasing. Drivers find value purchasing diesel vehicles
despite a higher price per vehicle for the diesel option of between $1,500 and $2,500. Diesel engines
are seen as more robust and considered to last longer which has factored into a resale value better
than both gasoline and hybrid cars.8 This perception may, however, have been negatively affected in
the wake of revelations of the emissions testing fraud by manufacturers of the popular Volkswagen
diesel vehicles.9
Environmental Performance of Diesel vs. Gasoline
Recent evidence shows that the environmental performance of diesel vehicles is in fact worse than
gasoline powered vehicles. While diesel is often touted as an energy efficient fuel, it is a major source
of GHG emissions and air pollution in OECD countries.
Table 1: Environmental Performance of Diesel vs. Gasoline
Grams per litre of fuel used Gasoline Diesel
Greenhouse Gas Emissions
CO2 2259 2662
Air Pollutants
Carbon Monoxide 71.417 2.467
Nitrogen Oxide 7.361 9.600
Particulate Matter 0.025 0.815
Volatile Organic Compounds 8.474 0.519
Note: Values for the pollutants (except CO2) are the mean estimate of emissions per litre. Diesel fuel produces 15.5% more GHG emissions per litre than
gasoline (accounting for methane and nitrous oxide emissions).
Source: Harding (2014),The Diesel Differential: Differences in the Tax Treatment of Gasoline and Diesel for Road Use, OECD Publishing.
7
The National Energy Board of Canada (2011), Energy Use in Canada’s North: An Overview of Yukon, Northwest
Territories and Nunavut – Energy Facts, https://www.neb-
one.gc.ca/nrg/ntgrtd/mrkt/archive/2011nrgsncndnrthfct/nrgsncndnrthfct-eng.html (accessed July 2016).
8
Vorano, Neil (2014), Are Diesel Cars a Good Choice for Canadians?, The Globe and Mail, August 21, 2014,
http://www.theglobeandmail.com/globe-drive/culture/technology/the-diesel-dilemma-popularity-in-europe-hard-to-
find-here/article20139895/ (accessed July 2016).
9
Volkswagen settles U.S. emissions lawsuit, but Canadian owners still waiting, The Canadian Broadcasting Corporation
(online), June 27, 2016, http://www.cbc.ca/news/business/volkswagen-lawsuit-deal-1.3655371, (accessed July
2016); Also, Cain, Timothy, Volkswagen’s Canadian sales are beginning to crater, http://www.autofocus.ca/news-
events/blogs/volkswagens-canadian-sales-are-beginning-to-crater, Autofocus.ca, March 9, 2016, (accessed July
2016).
11Fuel efficient diesel vehicles can be driven further on a litre of fuel, but contribute more CO2
emissions, nitrogen oxides and particulate matter than gasoline vehicles per litre of fuel used (Table
1). Diesel fuel has a carbon content around 18% higher than that of gasoline. After accounting for
methane and nitrous oxide emissions, a litre of diesel fuel produces approximately 15.5% more GHG
emissions than gasoline. Diesel fuel is also considered to have worse local air pollution effects than
gasoline, due to the higher emissions of particulate matter and nitrogen oxides per litre and three-way
catalyst technology that reduce carbon monoxide emissions from gasoline vehicles.10
Drivers already capture the financial benefit from more fuel efficient diesel vehicles, as a result of
lower fuel costs per kilometre travelled.11 There is therefore no need to provide a tax incentive based
on fuel efficiency performance, particularly given the relatively poor performance of diesel in terms of
GHG emissions and certain air pollutants.
Current Taxation of Diesel Fuel in Canada
In Canada, the current federal excise rates for fuels are set at $0.10 for gasoline and $0.04 for diesel.
12
In contrast, most Canadian Provinces tax gasoline and diesel at approximately balanced rates
(Alberta13, British Columbia, Saskatchewan, Manitoba, Ontario, Nova Scotia and Newfoundland), or at
higher rates for diesel (New Brunswick and Prince Edward Island). See Figure 3, below for a graph
comparing these rates across the country. 14 In June 2016 the Newfoundland Government announced
a doubling of fuel tax rates for gasoline from 16.5 to 33 cents/litre which makes these by far the
highest tax rates on fuels in Canada. 15
10
Harding, M. (2014).
11
Harding, M. (2014).
12
Government of Canada (2013), Canada Revenue Agency, Excise Taxes and Special Levies Memoranda; X3.1 Goods
Subject to Excise Tax, http://www.cra-arc.gc.ca/E/pub/et/x3-1/x3-1-e.html (accessed July 2016).
13
Government of Alberta (2015), Budget 2015:Tax Plan,
http://finance.alberta.ca/publications/budget/budget2015/fiscal-plan-tax-plan.pdf#fuel (accessed July 2016).
14
For the March 2015 Table of Canadian Provincial rates, see Alberta’s 2015 budget,
http://finance.alberta.ca/publications/budget/budget2015/fiscal-plan-tax-plan.pdf#fuel (accessed July 2016).
As of July 2016, only New Brunswick and Newfoundland’s rates have changed:
Newfoundland and Labrador Department of Finance, Gasoline Tax:
http://www.fin.gov.nl.ca/fin/tax_programs_incentives/business/gasolinetax.html (accessed July 2016).
New Brunswick Department of Finance, Gasoline Tax:
http://www2.gnb.ca/content/gnb/en/departments/finance/taxes/gasoline_motive_fueltax.html (accessed July 2016).
15
Newfoundland and Labrador Department of Finance (2016)
http://www.fin.gov.nl.ca/fin/tax_programs_incentives/business/gasolinetax.html (accessed July 2016)
12Figure 3. Provincial tax rates on fuel, July 2016
Source: Alberta Government 2015 Budget table of provincial tax rates on fuel, with 2016 updates from New Brunswick Government and Newfoundland
Government
In the northern territories, the Yukon government taxes diesel (7.2 cents/litre) slightly higher than
gasoline (6.2 cents/litre).16The NWT government taxes gasoline 1 cent more than diesel. These taxes
are significantly reduced “off highway”, for communities further away from transport routes and
supply points.17 Nunavut publishes an annual Tax Rate Sheet, and the diesel tax is set by legislation as
0.85 times the current tax rate on gasoline.18
The diesel differential by province, considering combined federal and provincial excise taxes, is
illustrated in Table 2 below. On average, the differential is around 6 cents across Canada. However,
Newfoundland and Labrador is a significant outlier with its recent temporary increase in gasoline and
diesel taxes. If Newfoundland and Labrador is removed from the calculation, the average differential
across provinces is around 4 cents. In most provinces, the differential is in the range of 4 to 6 cents
per litre. The three exceptions are: Newfoundland and Labrador, which has a 17.5 cent differential
with the temporary tax increases; New Brunswick, which has the same overall taxes for both gasoline
and diesel; and PEI, which has higher taxes for diesel than gasoline.
Table 2: The Diesel Differential by Province
16
Yukon Government Department of Finance (2014), Fuel Tax Exemptions,
http://www.finance.gov.yk.ca/ft_exemptions.html (accessed July 2016).
17
Government of The Northwest Territories, Department of Finance, Taxation Rates on Fuel Usage,
http://www.fin.gov.nt.ca/sites/default/files/Taxation%20Policy%20and%20Rates%20on%20Fuel%20Usage.pdf
(accessed July 2016)
18
Government of Nunavut, Department of Finance, Nunavut Tax Rates, 2016,
http://www.gov.nu.ca/sites/default/files/files/Finance/Taxation/nunavut_tax_rate_sheet_2016_english.pdf, See also
http://www.gov.nu.ca/sites/default/files/files/Finance/Taxation/rsnwt-nu-1988-c-p-5-part-1.pdf (both accessed July
2016)
13Cents per litre Gasoline (provincial tax + Diesel (provincial tax + 4 Differential
10 cent federal tax) cent federal tax)
British Columbia 31.2 26.7 4.5
Alberta 23 17 6
Saskatchewan 25 19 6
Manitoba 24 18 6
Ontario 24.7 18.3 6.4
Québec 29.2 24.2 5
New Brunswick 25.5 25.5 0
Nova Scotia 25.5 19.4 6.1
Prince Edward Island 23.1 24.2 -1.1
Newfoundland and Labrador 43 25.5 17.5
Average with 27.42 21.78 6.27
Newfoundland and
Labrador
Averaged without 25.69 21.37 4.32
Newfoundland and
Labrador
Canada has among the lowest taxes on both diesel and gasoline across OECD
countries
Canada has comparatively low taxation on road fuels compared with other OECD countries. Only the
U.S. and Mexico have lower rates, and Mexico has recently begun a reform to eliminate fuel subsidies.
14Figure 4. Tax rates on gasoline and diesel for road transport in OECD countries
Source: OECD calculations, based on data taken from Taxing Energy Use (OECD, 2013). Tax rates are as of 1 April 2012 (except 1
19
July 2012 for Australia). OECD-S is the simple OECD average; OECD-W is the weighted OECD average.
Note: Figures for Canada and the US include only federal taxes, but Canada’s would still be low even with provincial taxes included (average of Cdn $0.27
roughly equivalent to EUR 0.19 per litre).
19
Harding, M. (2014).
15Canada also has comparatively low revenues from environmental taxation across OECD countries
(Figure 5).
Figure 5. Environmentally-related tax revenues (2012) in OECD countries
Source: OECD calculations, based on OECD Database of instruments used for environmental policy (OECD, 2013c). Energy taxes
include taxes on fuels and other energy products. Motor vehicle taxes include taxes in relation to the ownership or annual registration of motor vehicles.
Other includes taxes levied on all other taxes bases of environmental relevance, such as taxes on waste,hazardous material, other air pollutants and
20
water. A * indicates that data for that country is for 2011.
Diesel Differentials across OECD Countries
In the 34 OECD countries, only the United States and Switzerland tax diesel at a higher rate than
gasoline per litre. The United Kingdom and Austria tax them at the same rate. However, the
Netherlands government is gradually increasing the tax on diesel while maintaining the same rate of
taxation on petrol. 21 The remainder, including Canada, tax diesel at lower rates per litre.
Figure 6 below illustrates the difference between diesel and gasoline rates as a proportion of the
gasoline tax rates. For countries that provide a lower rate (or “tax preference”) for diesel on a per-
litre basis, the discrepancy is greater when the “effective tax rate” in terms of CO2 emissions is
considered.22 Canada’s federal diesel tax rate is 40% of the gasoline tax rate. When provincial and
federal rates are considered together (Table 2), Canada’s diesel tax rate is 84% of the gasoline tax
rate, which would place Canada slightly above the OECD average.
20
Harding, M. (2014).
21
Bragadóttir, H. et al., (2014),The Use of Economic Instruments in Nordic Environmental Policy, 2010-2013,
http://norden.diva-portal.org/smash/get/diva2:738535/FULLTEXT02.pdf.
22
Harding, M. p. 13. Graphic, Figure 7 at p. 15
16Figure 6. OECD Countries: difference between diesel and gasoline tax rates
The OECD has been leading the way in challenging the lower taxation on diesel, and OECD economists
now emphasize that when “setting tax rates per litre of fuel, the appropriate comparison between
fuels is the environmental cost per litre of fuel use.”23
Fuel Taxes can have an Important Impact on Driving Behaviour, Vehicle Choice
and Innovation
Setting the right taxation rate on fuel is an important component of GHG policy because it influences
driving behaviour, vehicle choice and transportation innovation. OECD research has found a
relationship between the “tax advantage” of diesel over gasoline in OECD countries and its use as a
road fuel. The lower tax rate increase the use of diesel fuel.24 There are also several empirical studies
showing that when transportation fuel prices increase, fuel use decreases.
In the car market, transportation fuel taxes can influence purchasing decisions between gasoline and
diesel vehicles. Higher taxes can also encourage the purchase of more fuel-efficient vehicles,
particularly when they are part of a suite of measures including taxes on vehicles (section 2) and
labelling.
With heavy duty vehicles, there has historically been less responsiveness to fuel price increases, given
the relatively few alternatives to diesel engines.25 However, technology is changing rapidly in the
heavy duty vehicle market and options are growing by the year. The U.S. Office of Energy Efficiency
23
Harding. M. (2014).
24
Harding, M. (2014).
25
Harding, M. (2014).
17and Renewable Energy SuperTruck Initiative, for example, has resulted in 26 additional technologies
that have the potential to succeed in the market in the next two to four years. Industry partners such
as Daimler and Volvo have far exceeded the 50% efficiency improvement goal set by the organization
with advancements in combustion engines, lightweight materials and aerodynamic improvements.
The improvements on Class 8 trucks are estimated to create an opportunity to save 300 million
barrels of oil annually, while saving truck operators as much as US $20,000 per year on fuel.26
Canada’s federal regulations for heavy-duty vehicles (aligned with the U.S.)27 are expected to
improve the average fuel efficiency of trucks, reducing fuel consumption by 7.2 billion litres over the
lifetime of the model year 2014–2018 fleet.28
Mercedes also recently unveiled the first fully electric heavy-duty transport truck, with a 200
kilometre range and the ability to haul 26 tons. Mercedes expects it to be commercially available in
the early 2020s. Tesla CEO Elon Musk has announced plans to develop electric transport trucks and
heavy-duty buses.29
Higher fuel taxes will encourage even greater vehicle innovation by increasing demand for fuel-
efficiency and electric vehicles. Further investments in electric vehicle charging infrastructure would
also help the transition. It is preferable to invest in electric infrastructure rather than natural gas
vehicle fueling infrastructure. Given Canada’s GHG targets, there is not sufficient time to support a
transition fuel such as natural gas.
26
United States Government (2016), Department of Energy, Supertruck Leading the Way for Efficiency in Heavy-Duty,
Long-Haul Vehicles, June 27, 2016, http://energy.gov/eere/articles/supertruck-leading-way-efficiency-heavy-duty-
long-haul-vehicles (accessed August 2016).
27
Government of Canada (2013), Canada Gazette, Heavy-Duty Vehicle and Engine Greenhouse Gas Emission Regulations,
http://gazette.gc.ca/rp-pr/p1/2012/2012-04-14/html/reg1-eng.html (accessed July 2016); United States
Government (2016), Environmental Protection Agency, EPA Regulations and Standards: Heavy Duty
https://www3.epa.gov/otaq/climate/regs-heavy-duty.htm (accessed July 2016).
28
Government of Canada (2013), Environment and Climate Change Canada, Canada Gazette Part II Vol. 147, no.6,
Current Regulations: Heavy-duty Vehicle and Engine Greenhouse Gas Emission Regulations, http://www.ec.gc.ca/lcpe-
cepa/eng/regulations/detailReg.cfm?intReg=214, (accessed August 2016).
29
Canadian Manufacturing (2016), Mercedes Unveils First Fully-Electric Heavy-Duty Transport Truck,
http://www.canadianmanufacturing.com/technology/mercedes-unveils-first-fully-electric-26-ton-transport-truck-
172950/?custnum=23557353938&title=Director&utm_source=CTECH&utm_medium=email&utm_campaign=160803
B (accessed August 2016).
18Box 1. Diesel Fuel in Canada's North
The National Energy Board estimates almost three-quarters of northern Canadian fuel
consumption is a by-product of refined oil, and almost all this fuel is imported from the south. To
offset the cost of diesel in northern communities, there has been a Federal excise tax exemption
for diesel used as heating fuel, or for generating electricity. While the Federal Government made
a recent revision to the Tax Act, removing the tax exemption for using diesel fuel in industrial
processes, an exemption remains “exclusively” for heating homes. The 2016 Budget pledged
$10.7 million over 2016-18 to Indigenous and Northern Affairs Canada to help “off-grid”
Indigenous and northern communities move from diesel toward renewable energy and clean
technology. A gradual phase out of the excise tax exemption on heating fuel could support this
shift to greener infrastructure in northern communities. A separate program could be established
to ensure that low income Northern communities are not financially disadvantaged by the cost
increases (while preserving the incentive to reduce fuel use and seek diesel alternatives).
Sources: NEB (2011), INAC (2016)
European and Nordic Countries are moving to Balance Tax Rates on Diesel and
Gasoline
Some OECD countries are already moving towards balancing tax rates on diesel and gasoline. The UK
has equalized the tax on non-commercial diesel and petrol, removing the subsidy for non-commercial
purposes. The Netherlands Government is gradually increasing the excise duty on diesel while keeping
the tax on petrol unchanged.30 The European Commission has stated its intention to gradually phase
out diesel subsidies to non-commercial vehicles, “to remove the bias against petrol.”31
A recent case study for the Nordic Council examined whether lower taxation rates on diesel fuel
should be phased out as an environmentally harmful subsidy (EHS) in Norway, Finland, Sweden, and
Denmark.32 Iceland was excluded from the study as it already taxes diesel at a higher rate than
petrol.33 Norway has the highest tax rates for diesel and petrol, while recent tax reform in Sweden to
equalize fuel taxes per energy content, has brought diesel and petrol rates closer. 34 After evaluating
and comparing the environmental costs of diesel fuel and gasoline, the study confirmed that diesel has
a much greater negative impact. The study concluded that lower taxation rates could be considered
an EHS.
It was also noted that while Nordic countries have a higher vehicle road tax on diesel vehicles, the tax
was not sufficient to offset the adverse effects of the lower tax on diesel fuel.35 The study concluded
30
Bragadóttir, H. et. al, (2014).
31
Bragadóttir, H. et. al, (2014).
32
Bragadóttir, H. et. al, (2014).
33
Taxes on fuels in these countries generally include a CO2 charge and an energy charge.
34
Bragadóttir, H. et. al, (2014).
35
Bragadóttir, H. et. al, (2014).
19that the diesel EHS primarily benefits fuel producers, owners of private diesel-fueled vehicles and
manufacturers of diesel technology and should be removed.36
The Nordic study considered a scenario where the diesel and petrol (gasoline) rates were balanced or
harmonized in Norway, Finland, Sweden and Denmark. Based on the authors’ calculations, if the tax
rates on diesel (based on energy and CO2 content) were brought up to the same level as that of
petrol, the price of diesel in these four Nordic countries would increase between 8 and 16%. 37
Overall, the authors concluded that foregone revenue from the lower tax on diesel represented 5% of
total tax expenditure in these countries38.
The Nordic study considered the impacts on diesel consumption and revenue from an increase in
diesel tax rates. A higher tax rate per litre of diesel will increase revenue, but the amount of revenue
will decrease as consumers alter fuel use and vehicle choice. After calculating the net effect of these
“counteracting factors”, the study estimated that the countries could add over EUR 1 billion to annual
revenues (Table 3).39
Table 3. Nordic Study: Fiscal Impact due to tax harmonisation
Source: Bragadóttir, H. et al., The Use of Economic Instruments in Nordic Environmental Policy, 2010-2013,
In theory, the maximum fiscal potential of removing the diesel EHS was EUR 3 billion based solely on
current tax expenditure and no consumer response. Taking into account behavioural changes resulted
in an estimated revenue potential of approximately half of that amount. 40
To determine the environmental impact of the diesel EHS, the Nordic study followed guidelines
developed for determining the environmental costs of transport in Europe41 as well as in Finland.42
36
Bragadóttir, H. et. al, (2014).
37
Bragadóttir, H. et. al, (2014).
38
Bragadóttir, H. et. al, (2014).
39
Bragadóttir, H. et. al, (2014).
40
Bragadóttir, H. et. al, (2014).
20The CE Delft (2008) handbook on the external costs of transport in Europe calculates the
environmental costs of European passenger vehicles as set out in Table 2. The CE Delft values show
environmental costs for diesel vehicles are higher per km than gasoline passenger vehicles.
Table 4. Nordic Study: Environmental cost of different passenger cars
Source: Bragadóttir, H. et al., The Use of Economic Instruments in Nordic Environmental Policy, 2010-2013
Based on these guidelines, it was calculated that the diesel EHS removal would create an
environmental impact five times smaller (in monetary terms) than the overall fiscal impact, at
between EUR 89 and 222 million (Table 5, below).43
Table 5. Nordic Study: Environmental impact of a tax harmonization between diesel and
petrol
Source: Bragadóttir, H. et al., The Use of Economic Instruments in Nordic Environmental Policy, 2010-2013
The authors of the Nordic Study conclude if the subsidy is phased out, the increased price of diesel would make it possible to transition to “greater fuel
44
efficiencies, other types of fuels and other modes of transport”.
41
CE Delft, (2008), The External Costs of Transport in Europe,
http://www.cedelft.eu/publicatie/external_costs_of_transport_in_europe/1258. (accessed July, August 2016)
42
Bragadóttir, H. et. al, (2014).
43
Bragadóttir, H. et. al, (2014).
44
Bragadóttir, H. et. al, (2014).
21Canada’s Diesel Tax Rates Should be brought into line with Gasoline Tax Rates
In 2009, Canada pledged with other G20 countries to begin to phase out fossil fuel subsidies and has
since taken steps to end the Atlantic Investment Tax Credit (AITC, as of 2016) and the Accelerated
Capital Cost Allowance (ACCA) for Alberta oil sands projects (as of 2015). As shown in the Nordic
case study, above, setting diesel taxes at a lower rate than gasoline can be viewed as an
environmentally harmful subsidy. Increasing diesel tax rates will help Canada meet GHG reduction
targets, promote an accelerated shift to cleaner technologies and generate revenue.
Improved labelling of the environmental impacts of fuel choice would be a complementary measure
and help explain the rationale for a tax increase. 45 The OECD paper on diesel differentials suggests
that social and other economic policy concerns associated with the tax increase should be dealt with
separately, through “targeted forms of assistance for those in particular need, without providing
adverse environmental signals”.46
Recommandations
1. Increase the federal excise tax on diesel fuel by 4 cents per litre to close the diesel
differential in Canada. The tax increase should be gradually phased-in to allow for adjustment,
with a 1 cent increase each year for the following four years (commencing FY 2017, leading to an
8 cent per litre federal excise tax on diesel fuel by FY 2021).
2. Implement environmental labelling at the fuel pump and on new vehicles. Fuel pumps
should detail the GHG emissions associated with fuel choices (e.g. mean estimate of emissions per
litre in CO2 equivalent). Canada also recently introduced new vehicle labelling standards, which
create an opportunity to clearly explain each vehicle's average weighted fuel consumption
(L/100km) and CO2 emissions at the point of sale.47 Labelling diesel and other fuels at purchase
points to explain related fuel consumption and CO2 emissions is also consistent with the proposed
Low Carbon Fuel Standard. It will help better inform consumers about the environmental costs of
their fuel use and vehicle purchasing decisions48. This information can help influence both driving
behaviour and vehicle purchasing decisions towards greater efficiency and cleaner technology.
45
Tencer, Daniel (2015), Gas Retailers Line Up Against Climate Change Warning Labels on Pumps, May 26, 2015,
Huffington Post, http://www.huffingtonpost.ca/2015/05/26/climate-change-warnings-gas-pumps_n_7441534.html
(accessed in July 2016). Article notes some Canadian municipalities have initiated labelling at the pump on environmental
issues.
46
Harding, M. (2014).
47
Government of Canada (2016), Natural Resources Canada, EnerGuide Label for Vehicles,
https://www.nrcan.gc.ca/energy/efficiency/transportation/cars-light-trucks/buying/7483 (accessed in July 2016).
48
Harding, M. (2014).
22Estimated Impacts
The estimates provided should be considered rough, ballpark estimates only. Please see Annex 2 for
details on the assumptions, calculations and caveats behind these estimates.
Revenue Impact: A 4 cent increase in the federal excise tax on diesel fuel would be estimated to
raise between roughly $350 and $700 million per year by the time it is fully implemented
GHG Reduction Impact: A 4 cent increase in the federal excise tax on diesel fuel would be estimated
to reduce GHGs by between 0.3 and 2Mt annually once it is fully implemented, depending on
consumer responsiveness to diesel price changes.
Competitiveness Impacts: Historically, there has been concern about the competitiveness impacts
of diesel tax increases given the limited technological options available to reduce diesel consumption
and the high level of fuel costs as a proportion of operating costs in some sectors (particularly in the
trucking industry). However, by 2020 a number of new technological options are expected to be
available that will make the tax increase more affordable. Increasing diesel tax rates could also be an
important area of harmonization discussions with the U.S. and Mexico as part of joint efforts to
address climate change. Diesel prices currently vary by more than 4 cents across Canadian provinces
(Table 1), however, so an argument for harmonization with the U.S. would also support harmonization
across Canada.
Other Considerations
Use of Revenue: While directly tying new programs to anticipated revenue from the diesel tax could
be problematic given the uncertainty of the revenue stream over time, the additional fiscal room
could be used to justify new temporary programs that help support the transition of key sectors, such
as trucking, and vulnerable communities in rural or northern regions. It could also be used to support
transportation innovations and technology commercialization that accelerates the development of
alternatives for diesel-using sectors.
Adjustments: Given provincial variation in diesel differentials, and existing provincial measures that
also affect fuel prices such as B.C.’s carbon tax, there may be calls for adjustments to the proposed 4
cent diesel excise tax rate increase. While adjustments may be justified, the ultimate objective should
be to ensure equivalent taxation on diesel and gasoline fuels per litre across Canada, whether through
adjustments in fuel excise taxes, carbon taxes or some combination of the two.
Long-term Ambition: Over the long-term, Canada should consider raising taxes on both gasoline
and diesel fuel to ensure that they fully reflect the environmental and social costs of their use. As
23technological alternatives increasingly become available, this will help accelerate the transition to low
carbon vehicles and fuels and support markets for cleaner technologies.
2 MAKING THE FEDERAL TAX ON FUEL
INEFFICIENT VEHICLES MORE
EFFECTIVE
The Government of Canada currently places an excise tax on the purchase of a few classes of the
most inefficient vehicles on Canadian roads, known as the “green levy”.49 Thus far, the tax appears to
have little influence on purchasing decisions, as too few vehicles are covered, the tax is based on fuel
efficiency instead of CO2 emissions, and there is limited awareness of the tax and its role in achieving
climate change goals.
Trends in Vehicle Purchasing
In 2015, Canadians purchased new vehicles in record numbers, with light trucks (pickup trucks, SUVs
and vans) once again among the most popular choices.50 According to the last Canadian Vehicle
Survey conducted (2009) between 2000 and 2009, the number of vehicles in the “light truck”
category increased relative to cars. The number of SUVs almost doubled, and this category of the light
vehicle fleet increased from 6.9 percent to 12.8 percent. Meanwhile, the share of cars decreased
from 60.5 percent to 55.4 percent, while the share of station wagons increased by 1 percentage
point to reach 3.5 percent in 2009. At the time of the 2009 survey, there were 1.47 vehicles per
Canadian household on average (an increase from 1.43 in 2000).51
49
Most of the tax is on luxury brand automobiles, so a small portion of the passenger vehicle fleet. For a complete list of
vehicles taxed under the green levy, see Annex 1.
50
2015 Top 5 selling vehicles in Canada: Ford 150 (118,837), RAM 1500 (91,195), Honda Civic (64,950), GMC Sierra
(53,727), Ford Escape 47,726 ) Sources: Autotrader.ca website:
http://www.autotrader.ca/newsfeatures/20160106/canadas-25-best-selling-cars-in-2015/#jByYtGscwY5y958w.97,
See also http://www.autofocus.ca/news-events/news/canadas-30-best-selling-vehicles-in-2015 (accessed in July
2016)
51
Government of Canada (2011), Natural Resources Canada, Canadian Vehicle Survey 2009,
http://oee.nrcan.gc.ca/publications/statistics/cvs09/pdf/cvs09.pdf (accessed in August 2016).
24Figure 7: Light Vehicles by Body Type, 2000 and 2009
52
Source: Natural Resources Canada, 2009
52
Government of Canada (2011), Natural Resources Canada, Canadian Vehicle Survey 2009,
http://oee.nrcan.gc.ca/publications/statistics/cvs09/pdf/cvs09.pdf (accessed in August 2016).
25Figure 8 below illustrates that in the 2014 passenger fleet, passenger “light trucks” were a greater
source of GHG emissions than all other passenger vehicles. Although both passenger cars and light
trucks have become relatively more fuel efficient, this does not offset the increases in emissions due
to the shift in the vehicle fleet towards light trucks since 1990.53
Figure 8. Transportation sector greenhouse gas emissions, Canada 1990 - 2014
54
Source: Environment Canada
Environmental Performance of Efficient vs. Inefficient Vehicles
There is significant variation in CO2 emissions per kilometer across vehicles (Table 6). In most vehicle
classes, there is a range of choice, with a number of vehicles receiving some of the top CO2
performance rankings and hybrid or electric options available. Luxury sports cars are the worst
performers across car categories, but there are also a number of non-luxury vehicles that receive
poor CO2 ratings. There are fewer choices and less variation in performance in vans and pick-up
trucks, but some vehicles still outperform their counterparts.
In the mid-size car category, for example, the worst performing vehicle emits 3.5 times more CO2
per kilometer than the best performing vehicle. In the standard SUV category, the worst performing
vehicle emits 2.5 times more than the best performing vehicle. In the van and standard pick-up truck
categories, the worst performers emit 1.2 and 1.5 times more CO2 than the best performers
53
Government of Canada (2011), Natural Resources Canada, Canadian Vehicle Survey 2009,
http://oee.nrcan.gc.ca/publications/statistics/cvs09/pdf/cvs09.pdf (accessed in August 2016).
54
Government of Canada (2016), Environment and Climate Change Canada, Greenhouse Gas Emissions by Economic
Sector, https://www.ec.gc.ca/indicateurs-indicators/default.asp?lang=en&n=F60DB708-1 (accessed in August 2016).
26respectively. Increased private and publicly funded innovation across all categories - driven by more
stringent standards for new vehicles - holds the potential to expand the range of options available
with strong environmental performance.
Table 6: Comparison of Environmental Performance of Vehicles by Class
Make/Model Fuel Efficiency CO2 Emissions CO2 Rating
(Combined City-Highway (g/km) (1=worst, 10=best)
L/100 km)
Cars
Minicompact (l)
Best Fiat 500 6.8 160 8
Hatchback
Worst Aston Martin DB9 15.6 365 2
GT
Two-Seater (T)
Best Mazda MX-5 7.8 183 7
Worst Lamborghini 19.3 452 1
Aventador
Roadster
Battery- SMART FORTWO 2.2 0 10
Electric Electric drive
Option
Subcompact (S)
Best Ford Fiesta SFE 6.6 153 8
Worst Bentley Continental 16 375 2
GT Convertible
Plug-in Hybrid BMW i3 REX 6.0 22 10
Option
Battery- BMW i3 1.9 0 10
Electric Chevrolet Spark EV 2.0 0 10
Options Mitsubishi i-MiEV 2.1 0 10
Compact (C)
Best Prius c 4.7 111 10
Worst Rolls-Royce 17.2 404 2
Phantom Drophead
Coupe
Plug-in Hybrid Chevrolet Volt 5.6 32 10
Option
Battery- Ford Focus Electric 2.2 0 10
Electric option
Mid-Size (M)
Best Toyota Prius 4.5 104 10
Worst Bentley Flying Spur 16 375 2
(12 cylinder)
Plug-in Hybrid Hyundai Sonata 5.9 63 10
27Option Plug-in
Battery- Nissan LEAF 2.1 0 10
Electric
Option
Full-Size (L)
Best Ford C-Max Hybrid 6.0 140 9
Worst Rolls-Royce 17.2 404 2
Phantom EWB
Plug-in Hybrid Mercedes-Benz S 9.0 141 9
Option 550e
Battery- Tesla Model S 2.3 – 2.6 0 10
Electric
Option
Make/Model Fuel Efficiency CO2 Emissions CO2 Rating
(Combined City-Highway (g/km) (1=worst, 10=best)
L/100 km)
Vans
Minivans (V)
Best Mazda 5 9.7 226 5
Worst Chrysler Town and 12 282 4
Country FFV
Passenger Vans (VP)
Best Ford T-150 Wagon 14.6 342 3
Worst Chevrolet Express 19.8 465 1
3500 Passenger
GMC Savana 3500 19.8 465 1
Passenger
Pickup Trucks
Small (PS)
Best Chevrolet Colorado 10.5 247 5
(2.5 L, A6)
GMC Canyon 10.5 247 5
Worst Nissan Frontier 13.7 322 3
4WD (M6
transmission)
Standard (PL)
Best Ford F-150 10.9 256 5
Worst Toyota Tundra 16.3 380 2
4WD (5.7 L)
Sport Utility Vehicles (SUVs)
Small (US)
Best Toyota RAV4 7.2 169 8
Hybrid AWD
Worst Jeep Wrangler 13.4 314 4
Unlimited 4x4 (A5)
Standard (UL)
28Best Toyota Highlander 8.4 195 7
Hybrid AWD LE
Worst Mercedes-Benz 21.4 476 1
AMG G 65
Plug-in Hybrid BMW X5 9.9 153 8
Option xDrive40e
Battery- Tesla Model X 2.5 – 2.6 0 10
Electric
Option
Source: NRCan 2016 Fuel Consumption Guide
Current Federal Taxation of Fuel Inefficient Vehicles
The federal excise tax on fuel inefficient vehicles or green levy was enacted by the federal
government in March 2007, to replace the existing heavy vehicle weight tax. The green levy still
applies to “automobiles (including station wagons, vans, sport utility vehicles) designed primarily for
use as passenger vehicles, but not including pick-up trucks, vans equipped to accommodate 10 or
more passengers, ambulances, and hearses, in accordance with the vehicle’s fuel-efficiency rating.”55
The list of vehicles actually targeted under the green levy illustrates the very narrow target for this
tax (see Annex 2 for a complete list)56. It is similar in design to the U.S. “Gas Guzzler Tax”, in
capturing only the most polluting vehicles on the market, and is a tax based solely on the vehicle’s
average weighted fuel consumption.57 The calculation of the green levy is determined by Natural
Resources Canada and combines 55% of a vehicle’s city fuel consumption rating with 45% of the
highway fuel consumption rating. 58
Automobiles that have a weighted average fuel consumption rating of 13 or more litres per 100
kilometres will be subject to the excise tax at the following rates:
• at least 13 but less than 14 litres per 100 kilometres, $1,000;
• at least 14 but less than 15 litres per 100 kilometres, $2,000;
• at least 15 but less than 16 litres per 100 kilometres, $3,000; and
55
Government of Canada (2007), Canada Revenue Agency, Imposition of Excise Tax on Fuel-Inefficient Vehicles,
http://www.cra-arc.gc.ca/E/pub/et/etsl64/etsl64-e.html (accessed in July 2016)
56
Government of Canada (2007), Canada Revenue Agency, Notice to All Licensed Manufacturers and Wholesalers, and
Importers of Automobiles, http://www.cra-arc.gc.ca/E/pub/et/etsl64/etsl64-e.html (accessed in July 2016)
57
United States Government (2016), Environmental Protection Agency, Gas Guzzler Tax,
https://www3.epa.gov/fueleconomy/guzzler/index.htm (accessed in July 2016).
58
Government of Canada (2007), Canada Revenue Agency, Notice to All Licensed Manufacturers and Wholesalers, and
Importers of Automobiles, http://www.cra-arc.gc.ca/E/pub/et/etsl64/etsl64-e.html , and Government of Canada
(2007), Canada Revenue Agency, Imposition of Excise Tax on Fuel-Inefficient Vehicles, http://www.cra-
arc.gc.ca/E/pub/et/etsl64/etsl64-e.html (accessed in July 2016).
29• 16 or more litres per 100 kilometres, $4,000.59
Box 2. Canada’ s Gas Guzzler Tax … The Excise Tax on Fuel-Inefficient Vehicles ("Green Levy")
targets only the worst polluters in the Canadian passenger fleet. Many are from luxury brands
such as Bentley and Rolls Royce, or expensive racing cars like Aston Martin or Lamborghini. Levies
ranging from $1,000 to $4,000 are unlikely to discourage a luxury car buyer, nor do they fully
account for external environmental costs. The tax does capture some mid-price range, 8 cylinder
engine, “muscle car” models like the Chevrolet Camaro Z/28, or the Dodge Challenger, where tax
may have more of an effect on buyers. Only three SUVs pay excise tax. The Toyota Sequoia, and
Nissan Armada are the most polluting SUVs with a weighted fuel consumption of over 14.6 L/100
km, and are taxed at $2,000. The Jeep Grand Cherokee 4x4, is taxed at $1000. With a 6.4 L, 8
cylinder engine, it averages 16.6 L/100 km in the city and 10L/100 km on highways. Many
Canadian vehicles which are below the 13 L/100 km threshold greatly exceed this level for city
driving, but currently pay no tax.
Source: http://www.cra-arc.gc.ca/E/pub/et/etsl64/list/lst_vh-2015-eng.html, For a list of vehicles taxed in Canada, see Annex 1.
The tax applies mainly to luxury vehicles, performance/racing cars, and large, expensive SUVs.
However, it is not set at a high enough level to create a shift in consumer purchasing decisions
towards more efficient vehicles. Consider the worst performer in the two-seater car category, the
Lamborghini Aventador Roadster. Under the current approach, purchasers of the vehicle – which
costs more than $400,000 – would be required to pay only $4000. This is less than 1% of the
vehicle purchase price, for a car that emits 2.5 times the best performer in its class. The Aston Martin
DB9, which rates worst in its class of minicompact vehicles, and retails for more than $200,000,
would be required to pay only $1000.
Box 3. “ Pickup” trucks are not taxed
The federal excise tax on fuel-inefficient vehicles does not apply to pickup trucks. The small and
compact car market share in Canada is increasing, but trucks such as Ford’s F-150 (#1) and Ram
1500 (#2) are repeatedly the top-selling passenger vehicles in Canada. NRCan’s 2016 CO2
ratings (see Table 6) rank vehicles from 1 (worst) to 10 (best). Ford’s F-150 scores highest in the
standard pickup truck category at 5. Worst is the Toyota Tundra 4WD (5.7 L engine) with a score
of 2.
Sources: http://www.autotrader.ca/newsfeatures/20160106/canadas-25-best-selling-cars-in-2015/#jByYtGscwY5y958w.97; and
http://www.autofocus.ca/news-events/news/canadas-30-best-selling-vehicles-in-2015
59
Government of Canada (2007), Canada Revenue Agency, Imposition of Excise Tax on Fuel-Inefficient Vehicles,
http://www.cra-arc.gc.ca/E/pub/et/etsl64/etsl64-e.html. Or see http://www.cra-arc.gc.ca/E/pub/et/etsl64/etsl64-
e.pdf (accessed in July 2016).
30The fuel consumption threshold for application of the tax is also too high, with many of the worst
performing vehicles in each category not captured and the van, pick-up truck and heavy-duty vehicle
categories exempt.
Many OECD Countries have Vehicle Purchase or Registration Taxes
Many OECD countries have some kind of registration tax for vehicles, with the majority of these
based on CO2 emissions standards, as well as relative fuel or energy efficiency. In Finland, diesel cars
pay an additional tax (currently set at EUR 0.055 per day per 100 kilograms of weight) that is not
applicable to gasoline cars.60 New Zealand has road user charges based on the type of vehicle per
kilometre driven by diesel vehicles. 61
Norway, a leader in electric vehicle market penetration (see Box 6, below), has a registration tax on
vehicles, and an annual excise duty for light and heavy vehicles. In 2011, the registration tax created
EUR 2.6 billion in fees and is the largest source of environmentally related revenues for the Norwegian
government out of a total of EUR 8.2 billion.62
In the bonus-malus scheme used in France since 2008, the purchase of a car is either taxed or
subsidized depending on the efficiency of the vehicle. Vehicle taxes also depend on other factors, such
as emissions, power and fuel type. 63 The most polluting cars under this scheme are subject to a tax
of $2,600 Euros (approximately Cdn $3760). Less polluting cars can receive a price reduction up to
$1,000 Euros (approximately Cdn $1450). While the bonus-malus has been very effective in
creating a shift to more efficient and cleaner vehicles, it was costly and the net environmental effect
was negative, at least in the short term, due to increased upstream and downstream effects, as well
as vehicle mileage (see Box 5). 64
Box 4. France’ s Bonus-Malus Feebate: a lesson in revenue neutral design
In an evaluation of the bonus-malus feebate, its effect on the French vehicle market was described
as “spectacular”. While the regime promoted a shift from larger to smaller, more efficient cars, new
car sales rose by 13% and overall GHG emissions increased. The French government expected the
bonus-malus to be a revenue neutral measure, but it ended up costing the government 285 million
Euros in 2008. Evaluation of the program concluded that the main policy design problem was with
the “pivot point”: dividing less polluting vehicles which receive a rebate (bonus) from those more
polluting which will pay the tax (malus). The pivot point was too low and the rebates too generous.
“As the first-order terms in the policy effects are manufacturing or traveling scale effects, the most
60
important point to ensure CO2 reductions is to calibrate it in order to decrease or keep constant
Harding, M. (2014).
61
total sales”. The study concluded however that feebates can still be very efficient tools if carefully
Harding, M. (2014).
62
Bragadóttir, H. et al. (2014). See Table 30, p. 82.
designed.
63
Harding,
Source: M. (2014).
D’Haultfœuille, X. et al., “The Environmental Effect of Green Taxation:The Case of the French “Bonus/Malus”(2012), pp.2, 35,
64
D’Haultfœuille, X. et al., (2012), The Environmental Effect of Green Taxation: The Case of the French “Bonus/Malus”
http://www.crest.fr/images/doctravail/doctravail2012/2012-13.pdf
retrieved at: http://www.crest.fr/images/doctravail/doctravail2012/2012-13.pdf.
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